Deregulation fantasies

Several people on Twitter yesterday reminded us of Liam Fox’s vision of a deregulated labour market:

we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees.

This fits in with Tory fantasies of the post-Brexit UK being like Singapore.

It does, however run into a problem – that there’s no obvious benefit to deregulation.

My chart shows the point. It plots labour productivity in 2015 against a measure of employment protections in 2013-14: I’m taking a simple average of four OECD indices of protections again dismissals and regulation of temporary work.

It’s clear that, across 33 countries for which we have data, there is no correlation. It’s also clear that this fact is robust to outliers. Yes, the US has weak regulation and high productivity. But the UK and New Zealand have weak regulation and moderate productivity, which France and Belgium have high regulation but also high productivity.

You might think this is counter-intuitive. Common sense says that if firms can easily fire people then workers’ incentives to work hard are sharpened by a greater fear of the sack, whilst companies can more easily adjust their workforce to changes in market conditions.

These mechanisms, however, are offset by others, for example:

 - If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers. They might also spend less time working and more time looking for a new job.

 - A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed. This can reduce productivity, simply because new workers often take time to adapt to their new company’s clients, IT systems and to new colleagues.

 - If firms know they can fire at will they’ll devote less effort to screening or training, and so there might be worse matches between jobs and workers.

Deregulation might be good for bad employers who want to be petty tyrants, but it has no obvious aggregate benefit.

I don’t say this in the hope of changing anybody’s mind. As Jonathan Swift said, “it is useless to attempt to reason a man out of a thing he was never reasoned into.” And as Nick points out, Brexiters are a cult that’s immune to reason. But things are true whether or not you believe them.

Comments

[aragon]

Not all Brexiters share Liam Foxes view.

Vitality Ranking has almost destroyed companies like Microsoft, because Humans are treated as inanimate objects.

It seems economists are more likely than most to take a mechanistic view of humans.

Models and statistics cannot capture the whole picture. History may be a better guide.

You are not immune to the Jonathan Swift quote, which looks like nihilism.

[Dan]

Is productivity the right metric here? Say that employment laws make it more expensive/difficult to have employees. Businesses might respond by hiring fewer employees and instead investing in automation. The result would be higher productivity but higher unemployment. Anecdotally this describes France - but I don't know if the evidence bears that out.

[Dipper]

agreeing with aragon here about Fox.

Fox is a political failure who has been given a non-job so he can be fired at a convenient moment. Johnson is an entertainer who has been given a length of rope so he can destroy his own prime-ministerial ambitions. The one to listen to is David Davis.

[aragon]

Previous topic:
Just came across this link at CapX.co (Pro-Capitalism website)

http://www.vox.com/world/2017/3/13/14698812/bernie-trump-corbyn-left-wing-populism

"No easy answers: why left-wing economics is not the answer to right-wing populism"

(It is a long read) tl;dr version - immigration.

[Magnus]

Except that the reason Fox et al are in favour of deregulation has nothing to do with productivity.

[gastro george]

"The one to listen to is David Davis."

Judging by this morning's performance, he hasn't a clue.

"You don’t need a piece of paper with numbers on it to have an economic assessment"

"We'll be able to solve this because we want to."

Has govt undertaken economic assessment of there being no deal? DD: "If you mean under my time, no."

If there has been no economic assessment, then how do they know that no deal is better than a "bad deal".

Jesus. They're like 5-yr-olds.

[Adam]

Is deregulation something we really have to fear in Brexit Britain in any case?

Assuming that immigration will significantly reduce (big assumption), there could well be labour shortages - this should increase workers' bargaining power. In such a circumstance, you'd expect firms would indeed shy away from removing benefits and protections for fear of losing out to competitors on the best staff.

[nicholas]

Chris, I have to agree with Dan on this one. The issue is not productivity. With regard to the ease of firing workers, surely the argument made by deregulation advocates is that low barriers to firing people causes employers to hire more readily.
If you plotted a similar graph of regulation v unemployment, or youth unemployment, would it not show a strong correlation that deregulation causes lower levels of unemployment?

[nicholas]

Adam,
sometimes when you listen to hard core Remoaners, it is hard to decide if they think that Brexit will cause the economy to go down the pan because of too few jobs, or too few workers. Not that the 'hard core Remoaner' label applies to Chris, of course.

[Domi]

I agree with Dan & Nicholas, about unemployment.
Moreover, even if you focus on productivity you would get a somewhat different pattern using GDP/head.
The lower the working time, the higher hourly productivity.

[Dave Timoney]

"If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers". --- But more specialised skills are likely to command a higher wage so the reverse might also be true for skilled jobs: workers may seek to maximise training (where possible) if they feel their time in post might be short.

"A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed". --- The data suggests that employment churn increases when workers feel confident about finding a new job (i.e. employer demand is robust), not when they feel more vulnerable. The tendency of the majority is to sit tight and hope to avoid any cull.

"If firms know they can fire at will they’ll devote less effort to screening or training". Maybe, or they may simply extend the probation period, effectively screening on the job. To assume that this approach would be a drag on productivity, you'd have to prove that the base case - costly up-front matching with psychometric bells on - is efficient, but there is little evidence that this is so.

The broader point is that employment regulations actually have a relatively small impact on firm performance. Individuals react to changed incentives in different ways and most (not all) companies prefer to maintain their existing operations rather than seek to heavily exploit new regulatory "opportunities". The UK's relatively poor productivity is mainly a reflection on capital composition not the flexibility of labour.

[Dipper]

gastro george - perhaps DD should employ some experts. Economists with a track record of accurate forecasting, like the ones who said that not joining the Euro would mean a low-growth Britain outside a high growth Euro area, or the ones who said that voting to leave would cause immediate recession.

[gastro george]

Diversionary Dipper. There is plenty of shit in the world, and a not inconsiderable amount was spoken by the Remain campaign, but it's like an avalanche of shit from the government ATM. With Cameron and Osborne, you always knew that they had this posh private school thing where they thought that they could wing anything. But this crowd are worse, about as knowledgeable and organised as a dozen stoners sitting in the middle of a weed farm.

[Dipper]

gastro george - no-one knows anything. Those who think they do, don't. It really does all depend on how the negotiations go.

What most Leavers I know are looking for is some social transformation. Whenever you see some economists or journalist warning that we will have a shortage of doctors, just remember that at that very point thousands of Leave supporters are screaming at the TV set "how about training some of our own".

Many people believe what the EU has given us is a vast supply of cheap, trained, and exploitable workers from overseas meaning many UK citizens are just dumped on zero-hour shelf-stacking jobs with a 90% plus marginal rate of taxation meaning working harder or getting more skills is just a waste of time. What many Leavers believe is that the solution to the UK's problems is to be found by backing the people here, whereas many Remain politicians seem to think the people here are the problem and the solutions come from overseas.

[gastro george]

@Dipper - agreed about training enough doctors and nurses, it's a national disgrace. I'd have more sympathy if I thought the idiots had a plan to do this. They don't.

"What most Leavers I know are looking for is some social transformation."

If you look at the politics of Davis, Fox, etc., the social transformation you're likely to get is into a tax haven with continued austerity for the minions.

[chris]

@ Dan, Nicholas, Domi - I didn't mention the impact of labour market regulation on employment because I've already done so. Quite simply, there isn't one, as I wrote here:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/10/employment-protection-jobs.html

[@MickaelVeslot]

New generations'approach to jobs should be taken into account here. Youngs are far more likely to jump from one opportunity to another and completely change their career orientation several times. Their productivity really isn't about how secure they might feel in their position but a lot more about how they feel considered & what value they can bring.

[Anomalous Cowshed]

Chris,

You've focused on the firing aspect, but consider this;

"It is too difficult to hire and too expensive to take on new employees"

(I dropped a couple of words from the Liam Fox quote)

Hiring people, particularly skilled people, is frankly, an extremely expensive and time consuming process. This doesn't appear to enter into the debates surrounding employment regulation at all.

[Blissex]

«Many people believe what the EU has given us is a vast supply of cheap, trained, and exploitable workers from overseas meaning many UK citizens are just dumped on zero-hour shelf-stacking jobs with a 90% plus marginal rate of taxation meaning working harder or getting more skills is just a waste of time.»

I very much agree with that except for «the EU has given us». That is completely ridiculous, and the "Leaver" who think that «the EU has given us» that situation by imposing it on a subjugated UK government and parliament deprived of its independence and sovereignty are deluded.

Mass immigration and anti (native) worker policies have happened in the UK because they are very popular with those voters that are essential to returning parliamentary majorities.

Even in the case of the, New Labour with the support of the Conservatives lobbied the other EU hard to get very poor eastern european countries full membership well before economic "convergence", and to open the UK labour market to mass immigration from them and countries outside the EU. With the goal to boost the profits of UK business and property owners. A New Labour minister declared that cheaper immigrants meant lower costs for the NHS, and thus would allow lower taxes on higher incomes, and this argument has been repeated by the "Remain" campaign.

Since the voter majority that wants higher business and property profits and lower wages and benefits for workers still exists, after exit from the EU immigration of low-wage workers will continue, but of much cheaper asian and african workers.

For right-wing "Leavers" one of the issues with EU membership was that immigration from eastern european countries, being legally preferred, was displacing the immigration of much cheaper workers from outside the EU.

www.ibtimes.co.uk/buyout-boss-says-brexit-will-be-good-his-business-will-mean-30-cut-uk-wages-1602631
«One of the biggest names in European private equity said that Brexit will be good for his business, but will mean a 30% wage reduction for UK workers.
... He added that EU immigration will be replaced with workers from the Indian subcontinent and Africa, willing to accept "substantially" lower pay.»